A study on arbitrage and its application on different assets
Scope of the study
This study analyzes arbitrage trading and how it can be applied in different assets, including commodities, forex, and cryptocurrency. It also observes the current status and trends of each asset market explained in simpler terms.
Introduction
Arbitrage trading is a strategy that has been used for trading as a way to profit from price discrepancies of assets in the market. Like all types of strategy, arbitrage comes with risk. Understanding the different risks involved when arbitraging an asset and the status of different markets will provide more strategic options for traders during market volatility.
What is arbitrage?
Arbitrage describes the act of purchasing an asset in one exchange and concurrently selling the same asset in another exchange, thereby allowing investors to profit from the price discrepancies in the cost per asset. These discrepancies occur when exchanges and financial institutions are differently pricing an asset. Arbitrage opportunities exist because of market inefficiencies and would not exist if all markets were perfectly efficient.
Through arbitrage, prices are ensured that they will not deviate substantially from fair value for long periods. Because of technological advancements, profiting from pricing errors in the market can be challenging. The use of computerized automated trading systems set to monitor fluctuations in similar financial instruments can help in market inefficiencies. These setups are usually acted quickly upon, and the opportunity is often eliminated in seconds. Arbitrage plays a necessary part in the financial marketplace.
How arbitrage trading works
Arbitrage trading works as a result of market inefficiencies in the financial markets. One of the primary driving factors behind the markets is supply and demand, and a change in either of them will affect the asset’s price. Traders looking to take advantage of momentary price glitches in the markets can use an arbitrage strategy.
The purpose of arbitrage is to spot the differences in prices that can arise due to discrepancies in supply and demand levels across exchanges. As a part of the arbitrage strategy, traders can use computerized automated systems to their advantage. Automated trading systems rely on algorithms to spot discrepancies, which enable traders to jump on an arbitrage opportunity in the markets before the market adjusts.
Commodities
Commodities are basic goods used in commerce that are interchangeable with other goods of the same type, which is also used as an investment instrument. Traditional examples of commodities include grains, gold, beef, oil, and natural gas For investors, these investment vehicles can play an important role in diversifying their portfolio beyond traditional securities. Since the prices of commodities tend to move in the opposite direction to stocks, some investors also rely on commodities during market volatility.
The commodities market is driven by the basic principles of supply and demand. If there are any changes in supply, it impacts the demand; low supply means higher prices. For example, any significant disruptions in the supply of commodities, such as widespread disease that may affect cattle, can result in a spike in the generally stable and predictable demand for livestock. Apart from supply and demand, global economic development and technological advanced can also impact the commodities market.
Commodities Arbitrage
Commodities are a type of investment vehicle that is not directly correlated with traditional stocks and shares. However, commodities have pairs that have historical price movements that trend in consistent directions with one another. Commodities arbitrage involves the precise tracking of these correlated commodities such as gold versus crude oil and places strict trade orders on these asset pairs to generate a profit. One example would be gold and silver. These commodities tend to trend in the same direction, but gold is more volatile than silver. As a part of the arbitrage strategy, traders can long gold and short silver for a low-risk trade position.
Forex
The foreign exchange market, also known as forex, FX, or currency, is a global market or over-the-counter (OTC) market for trading currencies. The forex market is responsible for determining the foreign exchange rates for every currency. This includes all aspects of purchasing, selling, and exchange currencies at current or determined prices.
When it comes to trading volume, the forex market has an estimated turnover of US$ 6.6 trillion a day. It is considered the largest and most liquid financial market in the world. Supply and demand determine the different exchange rates, which also determines the trader’s profit. The forex market is open 24 hours a day, five and a half days a week. Currencies are traded worldwide in different major financial centers of New York, Tokyo, Zurich, Frankfurt, Singapore, Paris, and Sydney, across almost every time zone.
Forex arbitrage
Forex arbitrage is a trading strategy that provides retail forex traders opportunities to profit with no open currency exposure. This trading strategy involves taking advantage of opportunities presented due to market inefficiencies in the short window they exist. Forex arbitrage trading is the concurrent purchasing and selling of different currency pairs to exploit any pricing inefficiencies. Another type of forex arbitrage includes three currency pairs. An example would be EUR/USD, GBP/USD, and EUR/GBP. A trader can profit by trading using the first pair EUR to USD, then USD to GBP, and exchanging back GBP to EUR, pocketing the profit made from these currency exchanges.
Cryptocurrency
Cryptocurrency is a digital currency that utilizes an encrypted algorithm responsible for generating coins and securing transactions. This type of asset does not have any physical representation like commodities and fiat currency, which is why all transactions made for cryptocurrency are conducted via the internet. Bitcoin is the first cryptocurrency developed in 2009. There were others developed after Bitcoin, which is referred to as Altcoins, short for alternative coins.
The cryptocurrency market currently has over 2,000 cryptocurrencies as of January 2019. Globally, around 306 cryptocurrency exchanges are being tracked today. These exchanges have a combined market capitalization of US$ 358 billion. The value of cryptocurrency is determined by supply and demand. If the cryptocurrency has a high coin supply with little demand from traders and users, it will drop. If there’s a surge in demand for a coin, its value will increase.
Cryptocurrency arbitrage
Cryptocurrency arbitrage is the exploitation of price discrepancies between crypto exchanges. Arbitrage opportunities are present because of the increasing number of exchanges around the world, and inefficiencies often arise. Cryptocurrency arbitrage involves purchasing a cryptocurrency such as Bitcoin from an exchange, and immediately transferring and selling it on another exchange where the price is higher for a profit. Triangular arbitrage is often used in crypto arbitrage, where it involves three different currencies, the same strategy used in forex arbitrage.
Conclusion
Arbitrage is a strategy that can be applied across different assets. Traders might apply such strategies for potential profits, even during times of market volatility. Arbitrage opportunities are often short-lived since the market balances itself once traders find inefficiencies. For some, spotting such opportunities may be challenging, that’s why some traders take advantage of automated systems to easily spot arbitrage opportunities. Like all kinds of trading, traders must take necessary precautions since there are also risks involved in arbitrage.
About Jubilee Ace
Founded in the British Virgin Islands in 2018 with a paid-up capital of US$50 million, Jubilee Ace is an advanced data analysis company that specializes in multi-sector arbitrage opportunities on a global scale. The company started with traditional commodities trading arbitrage on exchanges before venturing into sports and cryptocurrency arbitraging. The company extracts and refines data, transforming these into monetizable strategies and actionable market decisions.
Jubilee Ace utilizes several real-time technologies that provide both new and experienced traders with a fresh perspective on growing their portfolios through low-risk investments across various sectors. A strong focus on data and technology advancement enables portfolio clients to be assured their finances are in capable hands.
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